Each quarter TBR’s Professional Services team reviews the activities, investments, financial performances and announcements of a wide range of vendors, including management consultancies like McKinsey & Co., market behemoths like Accenture and technology-centric services companies like Dell Technologies. The team then extracts trends affecting vendors, their technology partners and their clients across the broad ecosystem. In this blog, TBR’s subject-matter experts share their predictions for 2H23 based on trends in acquisitions, organization and talent, sustainability, and generative AI (GenAI) seen in 1H23. For quarterly performance analysis of individual vendors, start your Insight Center™ free trial today!
Acquisition Activity Is Low and Trending Down in 2023 and into 2024
Vendors acquire for skills, scale and clients — this has not changed. And yet, a more expansive and favorable ecosystem diminishes the need for massive scale as does the realization that no one can compete with the largest vendors on the strength of scale alone. (Accenture [NYSE: ACN] is closing in on 750,000 employees).
Similarly, trained and certified resources and even intellectual property can be more easily leveraged through partnering smartly. And with clients spending in smaller increments and with elongated budget cycles, maybe acquiring for new logos has lost some of its urgency. Accenture — normally an acquisition-a-day company — has been slowing down in 2023. Tech Mahindra and CGI (NYSE: GIB) also seemingly dialed back their acquisitive pace.
In the U.S. federal IT services sector, an area TBR covers in detail, analysts have seen a significant slowdown in acquisition activities, with no major moves since 2019 and many of the covered vendors redirecting capital to internal investments to optimize or to pay down debt.
- That said, within the IT services and digital transformations space, migration to S/4HANA remains a substantial opportunity, and many vendors still lack sufficient scale to meet demand. TBR anticipates that a push to pick up SAP (NYSE: SAP) talent could drive a 2H23 wave of SAP-specific acquisitions.
- Still, why acquire IP and technical skills, when you can just partner more smartly, leaning on the talent and client access in your ecosystem? As you partner better, you should be able to continue growing while acquiring less.
As with nearly every trend, TBR sees an outlier: Bain & Co. It is the smallest of the MBB (McKinsey, Bain and Boston Consulting Group [BCG]) consultancies. After 40 years of entirely organic growth, Bain has made at least three acquisitions in 2023 and 12 since the start of 2018.
As TBR noted in the Spring 2023 Management Consulting Profile: Bain, “Acquiring and embracing new technologies is no longer a hurdle to overcome but rather a springboard to broadening Bain’s capabilities and expertise so the firm can better serve its long-standing clients. Bain’s current acquisitions strategy is steady and should prove incrementally advantageous, rather than being disruptive to the firm’s operations or brand.”
‘End to end’ Is Ending, and GenAI Might Kill It
At an analyst event this spring, TBR heard leaders from a VAR/IT services vendor talk about their “superpower”: the capabilities and offerings that they believed they delivered at a level far above their peers.
While these leaders could perform a wide range of IT services, they focused on strengthening their superpower to include ensuring clients and ecosystem partners knew what made them special. In contrast, many of the vendors TBR covers describe themselves as “end to end.” While that once may have brought clients some reassurance that the vendor could handle anything and everything, minimizing the need for many IT and services suppliers (cue the “one throat to choke” and “too many cooks” cliches), TBR’s research shows that buyers value specialization.
IT services vendors and consultancies that credibly say, “We’re exceptional at this particular thing,” stand a better chance of standing out in a crowded field of vendors shouting about being end-to-end. Looking at the vendors themselves, having too broad of a portfolio becomes too broad to manage.
Some vendors struggle to operate efficiently, particularly when multiple large and distinct sales groups within the same organization sell differently to different clients or, worse, sell differently to the same client.
- Accenture Operations is separate from Accenture Technology, which is separate from Accenture Strategy, so that even within an organization it is hard to pass the baton. Of course, Accenture continues to grow in ways that many peers strive to emulate, but decades worth of smart management and corporate culture cannot be replicated easily, especially when organizations have been cobbled together from disparate parts.
- Into this mix, throw GenAI, which may do to the people business (IT services fundamentally remains a people business) what an asset-light approach to managing and delivering IT did to the asset-heavy vendors. Does GenAI make people — the professionals employed by these IT services vendors — into heavy assets, eventually outpaced by asset-light organizations that can function more efficiently? With layoffs across commoditized technology, the talent pool for enterprises and specialized IT services vendors has expanded, further diminishing the need for large-scale managed services providers.
Of course, there is always an opening for better software tools around productivity, and TBR has seen a ramp-up of investments in training, particularly across organizations. People Advisory Services (see EY) and certifications across cloud platforms (see TBR’s ) should keep IT services and consulting talent ahead of any existential threat from GenAI, but TBR expects, at a minimum, GenAI will accelerate specialization and eliminate end to end. Good riddance.
Near-term, Expect GenAI Opportunities Around Consulting and Limited Case Uses Around Productivity
When looking at the IT services and professional services space, TBR considers two GenAI tracks: What opportunities will vendors seize for generating new revenues, and what changes will GenAI force on how vendors operate?
Currently, the first track is pretty straightforward: Fear, uncertainty and doubt around GenAI — fueled by massive hype — create consulting opportunities, particularly for vendors with established governance, risk and compliance offerings. Every vendor has core artificial intelligence, data orchestration, analytics and cloud capabilities, so no vendor can credibly separate itself from the pack with those tools alone.
For TBR, the Big Four firms have the most near-term potential, followed by IBM Consulting (NYSE: IBM), which can lean into its technology legacy (think: Watson).
- On the second track, GenAI could be highly disruptive, especially around managed services, to include changes to the staffing pyramid, as less experienced employees either shift to higher-value tasks or leave. Of course, if you get rid of the bottom of the pyramid, how will you staff and grow at the top? Does GenAI change the number of new college graduates recruited every year into the always-growing headcounts of the largest IT services vendors? If demand for IT services accelerates, fueled in part by GenAI, how will vendors react in terms of hiring and staffing?
- In addition to internal challenges, IT services vendors may begin facing competitive threats from “born-on-AI” companies that can disrupt enterprises and their business processes across the entire technology stack. Will the smartest IT services vendors and consultancies invest in incubating born-on-AI practices to cannibalize themselves before a competitor does?
As with all the discussion around GenAI, TBR has more questions than answers. One calming note with respect to GenAI and the threat to IT services professionals across the entire staffing pyramid: For years, Tata Consultancy Services has had software that writes code, but the vendor still hires tens of thousands of people and is the second largest vendor, in terms of headcount, in TBR’s IT Services Vendor Benchmark. If GenAI is going to massively displace IT services talent, it will not happen in 2023. Or 2024. Maybe.
Two Mini Trends: From Transformation to Optimization (aka, Digital Gets Boring), and Sustainability Slows but Is Not Going Away
Digital transformation was fun: big ideas, disruption, every company a technology company, agile, innovation, design thinking. But now buyers have more defined needs and therefore no longer need unlimited spurt-like-crazy digital transformations. Buyers want to iterate and optimize what they have, not get excited about the art of the possible or the next big disruption (aside from GenAI, of course, for the moment).
With more cautious IT services and consulting buyers, the vendors now have greater openings for FinOps, which happens to open the door wider for value-added resellers seeking to expand into broader IT services. In this changed market, vendors also need to be more strategic around bringing new technology to clients that are a little wary of being sold new toys (or sold more cloud, which they are already getting tired of paying for).
If new technologies need to be sold cautiously, vendors need to manage their skill sets and not become over-stuffed with data engineers, solution architects and design thinkers whom they cannot deploy. The COVID-19 pandemic supposedly compressed three years of digital transformation into three months. If that is true, businesses now want to just run their business and leverage their IT infrastructure and not transform again so soon.
On sustainability, TBR’s Digital Transformation: Voice of the Customer Research and the annual Decarbonization Market Landscape show that enterprises have already budgeted for sustainability in 2023 and will still spend on consulting and IT services, although likely at a reduced pace. At the same time, IT services vendors and consultancies that built sustainability practices will continue to run them, although likely with less funding and enthusiasm, at least in the near term.
What might emerge over the end of 2023 and into 2024 is significant disruption from smaller consultancies providing specialized sustainability engagements and delivering credible results at rates cheaper than the Big Four and other consulting-heavy IT services vendors. Sustainability may, for a time, devolve into pockets of niche offerings, profitable only to those consultancies focused entirely on specialized services.